Governments have several policy options available to them through environmental accounting methods to incentivize citizens and businesses to choose greener options. Environmental accounting aims to internalize external environmental costs into the pricing of goods and services. When negative environmental externalities like pollution are factored into prices through appropriate taxation or other economic instruments, it creates incentives for actors to switch to less environmentally damaging behaviors and technologies.
One of the most effective tools is implementing a carbon tax. A carbon tax places an explicit price on greenhouse gas emissions, usually per ton of carbon dioxide or carbon dioxide equivalent emitted. This increases the cost of high-carbon activities and goods like fossil fuels, driving consumers and businesses to make greener choices that reduce their emissions footprint. The revenue from a carbon tax can be used to lower other taxes, fund the development of green infrastructure and climate solutions, or be returned to citizens through carbon dividend programs. Over 30 national and sub-national governments have implemented some form of carbon tax worldwide.
Cap-and-trade programs are another market-based mechanism that can drive emissions reductions. In a cap-and-trade system, the government sets a quantitative limit or cap on overall emissions from certain sectors of the economy. It then issues a limited number of tradable emission permits equal to the cap amount. Companies must have sufficient permits in their possession to cover their annual emissions. Those who pollute less can sell or trade unused permits to others with higher emissions. This establishes a price on carbon as the permit price fluctuates according to supply and demand. Revenues can similarly support green initiatives. The EU Emissions Trading System is the largest cap-and-trade program in operation today.
Subsidies for renewable energy and energy efficiency can also encourage greener choices by bringing down costs. For example, governments provide direct payments, tax credits, renewable energy certificates or feed-in tariffs for investments in solar, wind and other zero-emissions power sources. Subsidies are also used to promote the purchase and use of highly efficient appliances, electric vehicles, home insulation products and the like. They work to close the price gap between high-carbon and low-carbon alternatives by lowering the upfront or operating expenses of the cleaner options through targeted financial support. Denmark, Germany and many other countries have successfully scaled up renewables with strategic subsidy programs.
On the consumption side, feebate programs that charge fees on high-emitting goods and give rebates for low-emitting options are effective at influencing consumer decisions. They work by adding a surcharge to the purchase price of things like gas-guzzling vehicles and using the proceeds to provide discounts on electric cars, hybrids and more efficient models. This raises the relative cost of dirtier choices while simultaneously lowering the cost barrier for greener alternatives. The size of the fee or rebate can be calibrated based on vehicles’ emissions ratings to maximize the incentive’s impact. Feebate programs have been credited with significant emissions reductions in France and other European nations.
Beyond direct economic tools, regulations are also important for environmental accounting. Mandatory product efficiency standards, building codes, industry performance standards and bans on hazardous substances internalize environmental costs by requiring all actors to meet minimum clean technology or process standards over time. This creates a more level playing field for greener products and services to compete on price as dirty alternatives are phased out of compliance. Regulations work best when combined with market signals like carbon pricing to continuously drive innovation towards increasingly strict norms.
Together, through well-designed tax reforms, cap-and-trade mechanisms, strategic subsidies, fees and rebates, alongside complementary regulations, governments have strong policy levers available via environmental accounting to make green options relatively more financially appealing compared to polluting alternatives. With predictable, long-term policies now in place and adjusted over time, these tools can successfully transform economies onto a lower-emissions trajectory through decentralized decisions by informed consumers, businesses and investors that account for environmental costs in a transparent manner. With willingness to start ambitious carbon pricing complementing other policies already in place, ample evidence suggests Canada and many other nations could meet or exceed their international climate targets through environmental accounting incentives.